The Financial Reporting Council has issued a new reporting standard, FRS 102 which will replace the existing UK GAAP. The standard will apply to accounting periods beginning on or after 1 January 2015. However, prior period comparatives will also require restatement. The standard will apply to UK companies who do not prepare their accounts under IFRS (or the new FRS 101) and do not qualify as a small entity.
It is anticipated that the accounting changes required in FRS 102 will have an impact on companies corporation tax calculations. The severity of the impact will likely be dependent upon the size of the entity, with larger entities expected to be the most affected. The following areas are likely to be impacted:
- Intercompany balances. Based on the current drafting it is likely that where balances exceed one year they will be required to be carried at fair value which may be less than the loan principal if the balance is not on commercial terms. Any fair value adjustments will be charged to the profit and loss account. Careful consideration should be given to the tax treatment and any potential impact on the groups transfer pricing position.
- Financial instruments and hedging. It is expected that the new standard will result in an increased number of fair value adjustments being made, which could increase the volatility of the groups tax charge.
- Certain software costs will be reclassified as intangible assets. This could lead to an accelerated tax deduction as relief will be claimed for amortisation rather than via capital allowances.
- Investment properties and non-depreciated assets will be carried at fair value. This will give rise to deferred tax liabilities where the fair value is in excess of the tax base cost.
- Deferred tax must be provided for re-valued assets. It is no longer only a requirement if there is a contract for disposal in place at the year end.
- An IFRS approach will be applied to business combination accounting. A part of this process will involve valuing the intangible assets at fair value. Any increase in the fair value over the tax base will result in a deferred tax liability being created.
It is recommended that, where a company will be required to prepare its accounts under FRS 102, an impact assessment is undertaken to ensure that any corporation tax effects are understood and any transitional changes are managed.